Star’s future can be counted in months over this rate of cash burn

New boss Steve McCann has his work cut out to come up with a deal to save the casino. But he is fast running out of options.

New Star Entertainment Group chief executive Steve McCann faces limited funding options for the casino operator.

A quick glance at the latest accounts of Sydney’s sprawling leagues clubs, shows business is booming.

Even with a cost-of-living crisis biting hard in the suburbs, gaming revenue at the one of the city’s biggest pokie places, Bankstown Sports Club, has just hit a record $105m.

Mounties, near Liverpool, is booming too, with $151m in gaming revenue. The soccer mad Marconi, west of Fairfield, also returned bumper pokies income last year.

But Star casino, the biggest operator of pokies in the state, is fast running out of cash and now teeters on the edge.

Star Entertainment was temporarily delisted from the ASX last year after failing to post its annual financial results. Picture: AFP

In a worrying sign, Star burnt through nearly half of its $149m cash reserves through the December quarter, and that includes the addition of funds it borrowed from its lending syndicate. Excluding those borrowings, the burn was $107m.

At the current run rate, and without new funds coming in, the casino that has operations in Brisbane and the Gold Coast will start to run out of cash by the end of March. That’s two months away.

But it’s not just down to a run of bad luck that has seen Sydney’s biggest casino fall on hard times.

It’s little surprise that three years into a regime of regulatory shock treatment, Star is starting to crater. The business has churned through multiple management teams over that period and spat out countless directors. Given the uncertainty, the casino now struggles to retain any experienced senior staff.

New boss Steve McCann, the former Crown and Lendlease chief who only took charge late last year, has his work cut out on a last ditch rescue mission and his only realistic option is to engineer a sale. But with so much baggage weighing down Star’s accounts, even that is in doubt.

Shares in Star plunged 33 per cent on Thursday on the cash warning. The casino is now worth around $370m even though there’s more than $1.1bn of property on its balance sheet.

Will there be any takers?

Playing field

The biggest financial pain point is the playing field Star now finds itself on.

The move to cashless gaming and strict limits in Sydney’s casinos (including Crown) is turning punters off and sending them back into suburban leagues clubs where it’s business as usual.

The Blackstone-owned Crown across the water has also been hit by the mandatory cashless gaming rules, forcing it to cut staff and gaming floor space. However it is less exposed as its licence doesn’t allow it to operate pokie machines.

Tradies and other punters who live by cash have little appetite to sign up and deposit and track their money to use carded play in a casino. Currently there’s $5000 daily limits per patron on carded play. This drops to $1000 per day later this year.

Star’s casinos have been hit by new rules. Picture: John Feder

Supporters of the tough rules that came in last August say the dramatic drop in business for Star since the crackdown show the problems of the gaming industry are finally being cleaned up. Only they are not.

The very same gaming problems are walking right past the heavy regulation at Star and into the nearest leagues club.

The Victorians are also moving to cashless gaming, but have rolled the same rules out across the state – so it takes in pubs and clubs and not just Crown casino. Queensland rules put a $100 cash loading limit onto a pokie machine at any one time.

While cashless gaming has been trialled in some pubs and clubs in NSW the powerful clubs lobby has pushed back on being caught in the same regulatory net as the city’s casinos. And no politician wants to be seen as going soft on casinos after the blow-ups of last decade. So Star really is in a bind.

Early numbers since the carded play and cash limit rules were introduced show Star Sydney’s average daily revenue is down more than 15 per cent from the trading performance before the rules were introduced.

Star this week said difficult trading conditions continued, but was not specific. Gaming analysts believe the falls have become even steeper.

The dramatic drop in Star’s business of gaming has simply compounded the serious mess the casino finds itself in.

Business is booming for the Canterbury Leagues Club, part of the Bankstown Sports Club. Picture: AAP

Along with the serious rate of cash burn, Star said it may not be able to secure the remaining $100m in cash it had been banking on from its lenders to see it through its trading problems.

A condition to securing the $100m was Star had to go out and raise $150m of subordinated debt on its own. This was a tough ask when Star was in better financial shape a few months ago. Its even harder now.

Even if Star’s McCann managed to raise the funds this doesn’t solve the significant balance sheet issues facing the casino, according to Jefferies analyst Kai Erman.

Bell Two

Two years ago, Star had been slowly but steadily working its way out of what had been very serious regulatory breaches of money laundering rules, until the NSW independent Casino Commission overreached with a second full-blown inquiry into Star last year and stripped the casino of its gaming licence.

The so-called Bell Two inquiry released last August uncovered no wrongdoing except reveal painted regulatory regime that was putting the casino’s senior staff and board under extreme pressure.

Star still needs to pay another $10m of a $15m fine slapped on it in October by the NICC as the cost of Bell Two, as well as pay for a new round of expensive legal and consulting fees from more recommendations. Two years ago, the NICC collected $100m from Star after it crashed Austrac’s own investigation.

NICC chairman Philip Crawford. Picture: Nikki Short

Star needs to keep paying millions for transformation costs, including a myriad of cultural reforms ordered by the regulator.

At the same time, there’s more big completion payments looming for its over budget multi-billion dollar Queens Wharf development and casino in Brisbane.

The other big unknown facing McCann is the size of an expected fine from financial crimes regulator Austrac for its money laundering scandal of last decade.

This fine had previously been expected to be in the hundreds of millions, but now it looks like Star can barely afford to pay the legal fees.

Capping off the cash bleeding out of Star in the coming year is the prospect of a class action payout with a case working its way through the Victorian courts. Elsewhere there’s disputed $149m in back taxes owed to the ATO.

With a share price collapse putting a capital raising out of reach, McCann faces little choice but to consider more asset sales, with the well regarded Gold Coast casino previously drawing strong interest from key shareholder Bruce Mathieson.

Its Sydney hotel has also been earmarked for sale and McCann is looking at others including the Sydney car park. Like the cash, time is running out.

Rather than choosing to run a world class regulatory environment, NSW has instead opted to use Star as its private cash cow. The problem with this taking path, the casino will almost certainly go bust.

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Rex crash

ASIC’s case against the former chief executive and several board members of now collapsed airline Rex, misleading investors also reveals the fatal flaws in the airline’s capital city expansion.

Worryingly, the regional airline persisted with mounting losses it simply couldn’t afford for another 18 months without changing its direction. By then it was too late, an administrator was appointed last August.

ASIC’s misleading and deceptive conduct legal action, launched in December as a civil case, centres on what former executive chairman Lim Kim Hai knew about the airline’s true financial position when he issued a rosy profit forecast in February 2023. ASIC’s statement of claim also names John Sharp, Rex’s then deputy chairman and former transport minister under the Howard government, and Sid Khotkar the board representative of Rex’s biggest shareholder PAG.

Rex Airlines entered voluntary administration in July 31, leaving the fate of the country's third-largest carrier in serious doubt. Picture: AFP

When Rex told investors in February 2023 it expected operating profits to swing to a positive position for the full year, it was already sitting on a run rate of nearly $36m in losses. Therefore, it needed to match that figure in profit to at least turn positive.

At the time, bigger rival Qantas started to see domestic sales rapidly pick up, with demand running at 120 per cent of pre-Covid levels. But Rex was falling behind, despite chasing the capital city routes.

ASIC’s allegations centres on Rex’s executive and board failing to change the “positive operating profit” comment for another four months, despite monthly financial reports clearly showing the losses persisting and there was no chance of earnings turning positive.

Rex’s core regional business was especially poor by April 2023, suggesting the airline had was becoming distracted by the costly capital city expansion. As my colleague Robyn Ironside writes, in April 2023, Lim made a $10m cash call to PAG saying domestic sales were “disappointingly and bewilderingly bad” and attached a spreadsheet to back his case.

ASIC has stopped short of pursuing a case against the entire Rex board, rather confining the allegations to the company as directors it claims had direct knowledge of the airline’s financial health. Rex collapsed in July last year, owing around $500m, mostly on aircraft leases.

The federal government has injected $80m into Rex to keep its planes flying regional routes while it remains in administration. Rex is yet to file is defence.

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Originally published as Star’s future can be counted in months over this rate of cash burn